U.S. Handicapped In Indigenous Innovation Spat

Though the U.S. looks to be stepping up its dispute with China over controversial government-procurement policies, it is still handicapped by not having the full set of weapons it can use in other trade spats. The biggest threat it could make to China – the prospect of a suit at the World Trade Organization – is probably off limits.

The push for what the Chinese government calls “indigenous innovation” involves lots of what seems like laudable policies, like stepping up spending on research and development. The ire of foreign companies has focused on one component: the creation of government-procurement catalogue of products designated as representing such innovation by local firms.

The clear intent is to steer public money toward those products, and foreign firms fear they could lose out. Many U.S. companies have focused on the “indigenous innovation” rules as a concrete example of what they feel is an increasingly less welcoming business environment in China.

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The problem: Governments generally have a right to decide how they spend their own money. While the WTO’s Agreement on Government Procurement sets down legally-binding principles on how governments buy goods and services from the private sector, China is not yet a signatory to the GPA, though it has said it will try to join.

The office of the U.S. Trade Representative, in its National Trade Estimate report of March 31 discussed the U.S. concerns with China’s indigenous innovation policies, but admitted that “China may maintain these measures until it completes its GPA accession.”

That may be why U.S. Commerce Secretary Gary Locke has been keeping mum on exactly how the administration plans to push China on indigenous innovation at next week’s U.S.-China Strategic & Economic Dialogue. “I’m not going to go into specifics of how we are going to address this, other than that is a major, major concern to foreign companies and foreign governments, not just a concern for the U.S.,” Locke told reporters in Beijing Friday, after being pressed on the issue.

The tiff over the indigenous innovation rules could threaten another issue that has been highlighted in past rounds of the talks: the U.S. desire to see China join the GPA. At the Strategic & Economic Dialogue in July 2009, China agreed to submit a new offer to the WTO’s committee on government procurement, but then said it wouldn’t be able to make the deadline. China has since said it will submit the new offer, which will detail the changes it would make to its policies in order to comply with the GPA, this year.

Nicholas Lardy, a senior fellow at the Peterson Institute of International Economics, said the dispute over indigenous innovation gives China a clear incentive not to join the GPA. If China was a member of the GPA, the U.S. could try to use WTO rules to stop such Chinese policies – which it cannot do now. “Those naive enough to think China had much intention of acceding to the GPA in the foreseeable future, should revise their views,” Lardy said.

China this year has made changes to the original rules on the “indigenous innovation” procurement policy in response to the outcry, though they haven’t addressed all of foreign companies’ concerns. But Chinese government officials are also on record as supporting the principle most important to foreign companies: that they are treated as Chinese companies under the law.

“All foreign-invested companies that are legally registered in China are viewed as Chinese enterprises, and the products they manufacture are treated as made-in-China,” Ministry of Commerce spokesman Yao Jian said at a press briefing Monday. “These foreign-invested companies enjoy the same national treatment as Chinese companies.”

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